Patents and Innovation Economics

Ever wonder why the US has a record number of people on food stamps now, why the median family income is declining, why the labor participation rate is the lowest since Jimmy Carter? You need look no farther than the fact that the US has fallen from 2nd or 3rd in 2000 in the Cato/Fraser index of economic freedom to 17th. It is not just our economic freedom we are losing as the NSA and IRS scandals make clear. This is not just an academic exercise either. As the report makes clear longevity, access to medical care, education opportunities etc all deteriorate with a declining of economic freedoms.

The irony of this report is that the CATO Institute has been inconsistent at best about supporting property rights, which is the key issue underlying economic freedom. CATO has adopted a utilitarian basis for “property rights” that suggests they are just a useful artifact for efficiently distributing scarce resources. So in fact, they do not support property rights but property grants or privileges. This also means that they are confused that patents are not property rights. Patents are the single most important property right to economic growth, especially in a developed country. CATO is therefore in the position of being for property rights at an empirical level, but arguing against them on a philosophical level. Interestingly this also means that CATO is inconsistent about supporting our Constitution, which requires that Congress secure the rights of inventors to their inventions. No wonder the US is an economic basket case.

The Fraser Institute just released their annual Survey of Economic Freedom . According to the Study the US has fallen from 2nd in 2000 to 8th in 2005 to 19th in the World this year. This is consistent with my book, which suggests that the US started heading in the wrong direction around 2000. It is time for the Socialists and the Obama Administration and the Republican Establishment to admit they don’t give a damn about freedom or economic growth. Solving our economic problems is straight forward, we just need more economic freedom. Keynesians, big government promoters, and environmentalists are either Ludditesor they are lying to the American people. I think it is the later.

Our results have important implications for public policy. One is that patent laws and their enforcement matter for economic growth. However, our findings also suggest that patent rights vary by country and industry. We show that patent rights have a smaller impact on economic growth in poorer countries and in less patent-intensive industries. Since patent intensive industries account for a smaller share of the economies of the poorer countries, our results imply that the welfare gain in terms of economic growth for these countries is more likely to be outweighed by the welfare loss due to lower end-usage, and hence, tip the balance towards weaker rights being socially optimal. Abstract

The paper’s conclusion with respect to “poorer” countries being better off with a weak patent system is pure conjecture and was not part of their study. The reason that poor countries do not see a big boost by having stronger patent laws is: 1) poor countries are technologically backward and can advance economically by copying (purchasing) existing non-patented technologies, and 2) poor countries have poor property rights systems diminishing the effectiveness of their patent systems. A poor country is poor because of its low level of technology. Just raising a poor countries level of technology to the same level as the United States twenty years ago would result in huge economic gains. The reason poor countries have a lower level of technology is because they have weak property right systems that results in under investment in technology (Capital Spending). The paper hints at this point:

Our patent rights index depended on an assumption that enforcement of patent rights was correlated with enforcement of property rights in general, as measured by the Fraser index (The Fraser Institute does a study of economic freedom for all countries once a year). P. 10

In Figure 1, we plotted the Fraser index against the GP index (Patent Strength) scaled up by a factor of two. The two indices were highly correlated. P. 10

In other words, there is a strong correlation between the strength of property rights in general with the strength of a patent system in a country. This should not be surprising since patents are property rights in inventions. If you did a study of arbitrary government grants or monopolies versus the strength of patents in countries, you would find they are highly uncorrelated. Despite the nonsense that suggests that patents are monopolies.

Another interesting point in the paper:

Among 15 Western countries over several centuries, enactment of patent law was associated with higher rates of scientific discoveries, inventions, and innovations.